The tax year runs from 6 April to 5 April the next year. This means the most crucial UK tax deadline occurs in April.
That’s because there are various annual allowances and tax reliefs you need to make the best of to legally mitigate your income tax bill and to stop excessive taxes sapping your investment returns.
And most of these run on the basis of ‘use it or lose it’ by 5 April.
No good moping in June that you should have filled your 2023-2024 ISA allocation by 5 April, but you were too preoccupied by the Six Nations rugby!
No point cursing when you pay £500 in capital gains tax in July because you didn’t defuse it in March!
Of course you know this. You’re the sort who reads Monevator.
But it’s all too easy to overlook something.
We’re all only human. For now at least.
So while we wait for our A.I. overlords to steal this job from us too, here’s a checklist of what you need to think about as the UK tax deadline draws near.
Follow the links in each section to go deeper.
ISA allowance
The annual ISA allowance is the maximum amount of new money you can put each year into the range of tax-free savings and investment accounts that comprise the ISA family.
The ISA allowance for the current tax year to 5 April is £20,000.
You cannot carry forward or rollback this ISA allowance. What you don’t use in the tax year is lost forever.
ISAs are a superb vehicle for growing your wealth tax-free. But the rules are fiddly – seemingly made up by a bureaucrat with a grudge against mankind.
My co-blogger wrote the definitive guide to the ISA allowance.
Pension contributions annual allowance
There is a limit to how much money you can contribute to your pension in a given tax year while still receiving tax relief on those contributions.
This is currently £60,000. It is sometimes referred to as the pension annual allowance.1
Saving into a pension is mostly a tax-deferral strategy. That’s because you’re eventually taxed on pension withdrawals, unlike money you take out of an ISA tax-free.
In theory this makes ISAs and pensions equivalent from the perspective of tax.
In practice though, the fact that you can also draw a special lump sum from your pension tax-free gives pensions an edge in tax-terms – albeit at the cost of locking away your money for years.
Weigh up the pros and cons of each tax wrapper. We think most people should do a bit of both.
You can reduce your marginal tax rate by making pension contributions, if you can afford to go without the money today. Those on higher rate tax bands in particular should do the maths.
Personal savings allowance
Under the personal savings allowance:
- Basic-rate taxpayers can earn £1,000 per year in savings interest without having to pay tax.
- Higher-rate taxpayers can earn £500 per year.
- Additional rate taxpayers don’t get any personal savings allowance.
Back when interest rates were very low, these savings allowances seemed quite generous.
But rising rates have changed everything. Even interest on unsheltered emergency funds might take you over the personal savings allowance and see some of your interest being taxed.
Redo your sums. Higher rate tax payers might look into holding low-coupon short duration gilts instead. Recently these have offered a lower-taxed alternative to savings interest.
Dividend allowance
As of 6 April 2023, the annual tax-free dividend allowance was reduced to £1,000.
It’ll halve again from 6 April 2024 to £500 for the next tax year.
Dividends you receive within the tax-free dividend allowance are not taxed. But breach the allowance and you’ll pay a special dividend tax rate on the rest, according to your income tax band.
You can avoid the whole palaver by investing inside an ISA or pension.
Capital gains tax allowance
Everyone has an annual capital gains tax allowance, or ‘annual exempt amount’ in the lingo of HMRC.
This allowance is £6,000 until 5 April 2024.
Alas the allowance will then be halved to £3,000 from 6 April 2024. After that it will be frozen.
Capital gains tax is levied on the profits you make when you sell or transfer most assets. These assets include everything from shares and buy-to-let properties to antiques and gold bars.
You can shield your gains from capital gains tax by investing within ISAs and pensions. Go re-read the relevant bits above if you skimmed them!
EIS and VCT investments
You can also reduce your taxes by investing in Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS).
These vehicles are mostly marketed at wealthy high-earners for whom the large income tax breaks are attractive.
But be aware that these tax reliefs come with all kinds of risks, rules, and regulations.
VCTs
VCTs are venture capital funds run by professional managers who make investments into startup companies.
Somewhat quixotically, however, VCTs don’t even pretend to be trying to deliver high venture-style returns for investors.
Instead they aim to return cash via steadier tax-free dividends.
You can invest up to £200,000 a year into VCTs. You must hold them for at least five years to keep your 30% income tax relief.
Fund charges are invariably expensive, and the returns mostly mediocre – especially if you back out the tax reliefs.
EIS
EIS investing is even riskier. Qualifying companies are usually very young, and many investors buy into them via crowdfunding platforms rather than professional fund managers.
The quality of these EIS opportunities is extremely variable, and information usually scanty.
And while there have been a few big crowdfunded winners, the majority do poorly and often go to zero.
If you’re a captain of finance who buys Lamborghinis before breakfast, you may already know you can put up to £2m a year into EIS investments.
Again, you can knock 30% of your EIS investment amount from your income tax bill – and there are other reliefs too should things go wrong.
You must hold EIS investments for three years to qualify for the tax relief.
Most people shouldn’t put more than fun money into EIS or even VCT schemes, in our opinion. Certainly not unless they’re very sophisticated investors or getting excellent financial advice.
Check in on your tax band and personal allowances
The rate of income tax you pay depends on your total income from all sources. This includes salary, interest, dividends, pensions, property letting, and so on.
You add up all this income to get your total income figure.
You then subtract your personal allowance from the total to see which tax bracket you fit into.
Everyone starts with the same personal allowance, regardless of age:
- For 2023/24, the personal allowance is £12,570.
Your personal allowance may be bigger if you qualify for Married Couple’s Allowance or Blind Person’s Allowance. But it’s smaller if your income is over £100,000.
For England, Wales, and Northern Ireland, the income bands after deducting allowances are currently:
Income Tax Rate | 2023/2024 | 2024/2025 |
Starting rate for savings: 0% | £0-£5,000 | £0- £5,000 |
Basic rate: 20% | £0- £37,700 | £0- £37,700 |
Higher rate: 40% | £37,701-£125,140 | £37,701-£125,140 |
Additional 45% rate | £125,141 and above | £125,141 and above |
Source: HMRC
Note: If your non-savings taxable income is above the starting rate limit, then the starting savings rate does not apply to your savings income.
Scotland has its own income tax rates.
As we’ve seen above, there are further allowances and reliefs for income from certain sources – such as dividends and savings – that can reduce how much of that particular income is taxable.
You can also take steps such as making additional pension contributions or having a spouse hold certain assets to further reduce your taxable income or the highest rate of tax you pay.
Don’t make the UK tax deadline into a crisis
Scrambling around to exploit these allowances before the tax year ends is not only stressful – it’s also financially suboptimal.
If you had cash lying around that you might have put into an ISA earlier in the year, for example, then it could have been earning a tax-free return for months already.
But don’t blush too hard if you find yourself in this position.
Most of us are similar, which is why we wrote this article – and why the financial services industry bombards us with ISA promotions every March.
Try to automate your finances to invest smoothly and intentionally over the year.
And remember that April also brings warmer weather and longer days. Life is about much more than money and taxes!
Save and invest hard, take sensible steps to mitigate your tax bill, and enjoy life like a billionaire on whatever you’ve got leftover.
Thanks for your article TI. I myself also had to consider the savings interest allowances this year because of the increases in interest rates on savings now. Thankfully I still fell under the threshold. This was for my emergency fund. I feel relieved that all my investments fall under my ISA and Pension now so it’s a lot less to think about until I actually start pulling on my pension in older life.
ALL HAIL THE £20,000 ISA LIMIT! This has made it a lot easier for me personally.
TFJ
@TI – thanks for this, and perfect timing.
I’ve taken my PCLS and will be squirrelling it away into my ISA over the next few years. But I have a question:
Assuming no other income from April 2024, if I have taken £12570 from my SIPP, using up my personal allowance, can I then take an additional £5000 from my SIPP, using my 0% Starting rate for savings? I.e. £17570 from the SIPP only, without incurring Income Tax? Or does that have to be from non-sheltered sources?
Basically, I want to empty my SIPP tax free (and legally, natch.) Hoping you (or someone) know the answer.
@Brod No, AIUI the starting rate for savings is for interest, not for pension income. So £12570 from your SIPP will be tax free.
@Brod
My understanding is NO – the savings allowances (£1k + <=£5k) must be from outside of SIPP. All pension income is taxed as per income, but no NI (ignoring tax free element)
If I’m wrong someone else will chip in.
I’m a few months behind you – much fun and games
@TI, I appreciate that you wrote that “saving into a pension is mostly a tax-deferral strategy” but are you underestimating the potential National Insurance savings?
If I pay into a salary sacrifice scheme I save NI on the money going in and pay none on the future pension income. Unless I have misunderstood something that is a 10% saving on earnings above £12,500 pa that are funnelled into a pension,
Thanks @Boltt, as I suspected.
Sounded a bit too good to be true 🙁
You wrote that: “Saving into a pension is mostly a tax-deferral strategy. That’s because you’re eventually taxed on pension withdrawals, unlike money you take out of an ISA tax-free.
“In theory this makes ISAs and pensions equivalent from the perspective of tax.”
A Lifetime ISA beats a DC pension for an eligible investor with £4,000 per annum to invest, as the government top-up of £1,000 is equivalent to the tax rebate on pension contributions but at age 60 (or when buying a first residential home with a mortgage) the full investment can be withdrawn with no further tax to pay.
This won’t be significant for most of us reading here, but it should be kept in mind for our offspring!
Re cgl allowance and bed and breakfasting rules – if I sell vanguard life strategy 80% Acc, can I buy the life strategy 80% income fund and not fall foul of the 30 day rule?
@all — Thanks for the suggestions and comments!
There’s a reason this article is a 1,500 word guide and it explicitly links to underlying articles. The full text of the underlying articles is approaching 20,000 words…
There are countless permutations and quirks with pretty much all these topics, so definitely go deep for more information. 🙂
@dangerousdave I am no tax expert but I think you’d be on very risky ground trying to claim that accumulation and income units in the same fund count as different funds. You could put 80% of the sale price in LS100 and keep 20% as cash or put the 20% into a bond fund I guess. You will make accounting much easier if you only buy income units in your non-tax protected share account. (You ultimately pay the same tax on acc and inc units but it’s easier to see what the income is with inc units) Relatedly you can sell one tracker and buy a different one tracking exactly the same index and be safely the right side of the 30 day rule
@dangerousdave They have different ISINs and therefore they are different. You’re fine.
Also think that’s fine dangerous Dave but…
Don’t think bed and breakfasting works well for life strategy funds. Takes a couple of days to sell, a couple of days to buy. By which time the market may have moved by more than the cgt you would pay. IMHO it only really works for etf’s or similar where you are buying / selling almost instantly the same underlying instrument
@ Seeking Fire. If you introduce some new money, you can use that to buy and sell at the same time and at the same price (unless swing pricing?). Once moved everything, then pay yourself back.
RE: the bed and breakfast rule, there’s was some discussion about this on the post below that you might fund interesting.
Personally I wouldn’t do anything that even *appears* potentially iffy, whatever the specifics of the rules appear to say.
But I’m paranoid, excessively law-abiding, and not a tax expert.
https://monevator.com/bed-and-breakfasting-and-cgt/#comments
It’s unquestionably a good idea to take advantage of tax allowances – we are pretty confident that there’s not going to be a future with a negative tax rate. What about using up amounts in lower bands now rather than potential higher bands later?
I’m in the position that I have around 75% of investments unsheltered. Should I be making the most of 10% cgt now rather than 20% (or more if tax rules change) later?
My current view is that I’d pay 10% tax all day and I should lock in gains and make the most of it. I’ve not found any analysis on this point, unfortunately.
@onion
I live in hope that the CGT allowance will be removed and indexation is reintroduced- but I’m not holding my breath.
The 10% CGT rate only applies for basic rate tax payers, if your gains take you into HRT territory then you’ll pay 20% on the excess amount (18/28% for property gains)
If i had unsheltered gains and headroom in the basic rate tax band I’d be using it PDQ – (and rebuy in my ISA)
Personal view only…
@boltt – yes, your assumptions there are right. I am a basic rate tax payer – no income/pension + some dividends and interest income.
Thanks for your take. Nice to know that what I’m up to isn’t completely bonkers!
@Dangerousdave
It is the same underlying asset, so you will be caught by the 30 day rule. That they have different ISINs is irrelevant.
Why don’t you just buy a different fund/ETF, or possible two if you still want an 80/20 split, e.g. FTSE All World tracker ‘VWRL’ with 80% and a bond fund with 20%?
If you are desperately unhappy with this, or it must be LifeStrategy 80, then 31 days later sell them and buy the LifeStrategy 80 Inc. This is the only way you will be safe.
@dangerousdave – you could also consider selling LS80 Acc and then buying 50% LS100 Acc and 50% LS60 Acc with the proceeds. Not guaranteed to be a perfect replica of LS80 Acc but should be very (very) close.
Love how this question on ACC Vs inc, CGT on funds just rumbles on and on with no sign of resolution across multiple articles. The internet has no consensus and HMRC are AWOL. It is, for now, seemingly unanswerable…
Next tax year, I’m using all available options to keep taxable income below 75k. Yes, I live in Scotland, where higher earners are getting hammered from next tax year. My aim is now to work a lot less and start transferring non tax sheltered assets into our ISAs and SIPPs over the next 5 – 10 years.
@Onion, I agree with you and Boltt – use it (your 10% band) or lose it.
@Rhino, the internet may have a termination for you – see https://forums.moneysavingexpert.com/discussion/5860818/accumulation-and-income-funds-cgt – for some highly informed comment from Bowlhead.
Also check out the two links in ColdIron’s post there. These lead to some fascinating interaction between the erudite B/H and his doubters. (Monevator gets a mention).